World Bank economist offers research advice, talks fiscal policy

World Bank Chief Economist for Latin America and the Caribbean Carlos Végh met with students and shared insights and tips to help them with their research topics.

Ever wonder what it would be like to get one of the most distinguished professionals in your field to give you advice on a project? For a group of students, this dream came true recently.

World Bank Chief Economist for Latin America and the Caribbean Carlos Végh visited FIU last month for a public talk and met with students studying economics, international relations, public administration and Latin American and Caribbean studies.

What at first seemed like an ordinary meeting transformed into a spontaneous and much-appreciated mentorship and teaching moment, as students – many of them Ph.D. students – enthusiastically asked their questions. Végh made diagrams on the board and gave personalized tips and suggestions on how students could continue their research topics and strengthen them.

“At the student meeting, I asked a question related to the structural transformation of Latin America,” said Yulin Hou, a Ph.D. candidate in economics. “That is my future research objective. Dr. Végh mentioned two strands of literature and recommended one possible solution.

“The feedback increased my confidence to do this line of research because it gave me a different perspective. I learned that keeping an open mind and being willing to learn from fresh ideas would help me better understand the topic I am currently doing.”

 Latin American and Caribbean fiscal policy

Earlier that day as part of his public talk, Végh addressed some of the most pressing economic issues facing Latin America and the Caribbean.

“Dr. Végh’s research on monetary and fiscal policy in emerging and developing countries has been highly influential,” said John F. Stack, Jr., founding dean of the Steven J. Green School of International and Public Affairs. “It is such an honor to have him here to speak to us.”

Végh (center) answered questions from audience members after his talk. Barry Levitt (left), associate professor in the Department of Politics and International Relations, moderated the discussion.

Twenty-eight of 32 countries in the region will show an overall fiscal deficit for 2017. While the region’s real GDP is expected to grow this year and in 2018, Végh said, “the fiscal situation is still weak, and a fiscal adjustment will be required in many countries.”

Monetary policy, made up of the actions of a country’s central bank or currency board, is a major area of concern. These policies determine the size and growth rate of the monetary supply – and impacts interest rates.

Végh said the question facing these countries is a difficult one: To best confront economic challenges, should they increase the policy interest rates or decrease them?

If central banks in the region choose to increase policy interest rates (known as procyclical monetary policy), it will defend domestic currency and fight inflation, but a possible recession or slowdown may occur or could be aggravated.

On the other hand, decreasing the policy interest rates (known as countercyclical monetary policy) will stimulate economic activity but may also lead to depreciation and inflationary pressures.

“Historically, while developed countries have been countercyclical, emerging markets have been procyclical,” he said. “There is no advantage to procyclical monetary policy.”

This monetary policy dilemma usually doesn’t come about in industrial countries because they often have larger economies, and inflation and GDP tend to be positively correlated – either increasing or decreasing together.

Emerging markets, however, often find GDP and inflation or depreciation to be inversely correlated – bringing them to the dilemma of whether they should increase or decrease interest rates in midst of rising levels of inflation or depreciation.

According to a semi-annual report conducted by Végh and his team, solutions to help emerging markets become more countercyclical include the emerging  markets’ establishing “an independent central bank; low levels of dollarization; and a credible monetary policy framework (typically built over many years), which inspires market confidence and prevents some depreciation of the currency in bad times from becoming a major source of instability.”

To read the report and learn more about the monetary policy dilemma, click here.